Park Hotels & Resorts Inc

Greetings and welcome to the Park Hotels and Resorts Inc. Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ian Wiseman, Senior VP, Corporate Strategy.

Please go ahead, sir.

Thank you, Operator, and welcome everyone to the PARC Hotels and Resorts Third Quarter 2022 Earnings Call. Before we begin, I would like to remind everyone that many of the comments made today are considered forward-looking statements under federal security laws. As described in our filings with the SEC, these statements are subject to numerous risks and uncertainties that could cause future results to differ from those expressed, and we are not obligated to publicly update or revise these forward-looking statements. Actual future performance, outcomes, and results may differ materially from those expressed in forward-looking statements. Note also that all comparisons to prior year periods are on a pro forma basis. please refer to the documents filed by PARC with the SEC, specifically the most recent reports on Form 10-K and 10-Q, which identify important risk factors that could cause actual results to differ from those contained in forward-looking statements. In addition, on today's call, we will discuss certain non-GAAP financial information, such as FFO and adjusted EBITDA. You can find this information together with reconciliations to the most recent, to the most directly comparable GAAP financial measure in yesterday's earnings release, as well as in our 8K filed with the SEC, and the supplemental financial information available on our website at pkhotelsandresorts.com. This morning, Tom Baltimore, our Chairman and Chief Executive Officer, will provide a review of PARCC's third quarter performance, an outline of PARCC's strategic priorities, and the outlook for the balance of this year. Sean DeLorto, our Chief Financial Officer, will provide additional color on third quarter results, an update on our balance sheet and liquidity, and guidance for the fourth quarter. Following our prepared remarks, we will open the call for questions. With that, I would like to turn the call over to Tom.

Thank you, Ian, and welcome, everyone.

I am pleased to report another strong quarter where we delivered solid performance across our portfolio as we saw strength across all demand segments. Lodging fundamentals continued their positive momentum into the third quarter, supported by a strong labor market and healthy consumer and corporate balance sheets, which translated into steady growth in business transient demand and stronger than expected group demand in the quarter, especially post-Labor Day as we witness broad-based return to office trends. And despite headline risk over increasing macro uncertainty, we currently do not see weakness in our business with continued improvements to group, business transient, and international demand for the fourth quarter and beyond. Also for the quarter, We remain laser-focused on our capital recycling priorities, and I'm pleased to report that we closed on three non-core asset sales since July for total proceeds of approximately $58 million, taking our year-to-date net proceeds to approximately $317 million from the sales of our interest in seven hotels. And despite recent choppiness in the debt markets, interest in hotel real estate remains high, and we expect to execute on additional non-core asset sales, including potential deals in excess of $100 million. And these would bring our total net amount of closed and pending dispositions for the year to over $500 million, well within our expanded target discussed last quarter. Once closed, our liquidity position would exceed $2 billion, which we believe will give us the optionality to pivot between defense and offense during these uncertain economic times. From an operations standpoint, we continue to benefit from the efficiency measures we implemented over the last two years, with total labor costs pacing below 2019 levels despite increases to both wage rates and benefits, translating into an expected 15% reduction in labor costs for the full year 2022 versus 2019. As we have noted before, we are confident that the $85 million of expense savings, nearly 300 basis points of margin improvement achieved over the last three years are permanent, leading to meaningful gains as the portfolio returns to prior peak levels. We also continue to focus on unlocking the embedded value of our portfolio through our value-enhancing ROI pipeline. At Bonnet Creek, our $110 million meeting space expansion includes two new standalone ballrooms. The ballroom at the Waldorf Astoria is scheduled to open next month, and initial feedback from meeting planners has been enthusiastic. And at the Signia Hilton, we are adding 90,000 square feet of multifunctional meeting space which is expected to be ready for use by early 2024. In addition to the ballroom expansion, we plan to invest an incremental $80 million on a comprehensive renovation of the complex, which includes all 1,500 guest rooms, all public space, and updates to our signature golf course, with all work expected to be completed by early 2024. Overall, this considerable investment is expected to help solidify the complex's position as one of the best in Orlando. In addition, we have initiated plans for a full-scale renovation of the Casa Marina Resort in Key West, a $70 million project, which will include a transformation of the public spaces and guest rooms, and the addition of a new oceanfront restaurant. We expect to start construction in May of next year. with a targeted completion date of early December 2023, in time for the peak holiday travel season.

We are incredibly excited about the transformative ROI project for this iconic resort.

Turning to our quarterly results, third quarter pro forma RevPar increased 62% year over year, having recovered to nearly 91% of 2019 levels. Performance continues to be led by strong leisure trends, with RevPar at our resort hotels finishing 14% above 2019 during the third quarter, as rates exceeded 2019 levels by 23%. Occupancy was within 93% of 2019 levels. Our two Hawaii hotels recorded an average RevPar increase of 13% over the third quarter of 2019, with the Hilton Hawaiian Village reaching average occupancies in the mid-90s in July and August, and an all-time monthly high of $354 in ADR for July, and on pace to achieve a near-record EBITDA. This outstanding performance has occurred despite the lack of inbound international travelers, which has historically represented nearly 30% of the hotel's demand, with 60% of this international demand historically coming from Japan. As we look ahead to 2023, the recent easing of travel restrictions in Japan is expected to finally drive the return of Japanese guests to our Hawaii and West Coast hotels, providing a welcome tailwind for the portfolio. At our urban hotels, we continue to witness material improvements in demand, with occupancy increasing nearly 400 basis points sequentially, over the second quarter to end the quarter at 68%. Our urban portfolio witnessed particularly strong performance post-Labor Day, driven by return to office trends in major markets, which translated into average occupancy of approximately 71% in September. Corporate negotiated revenue continued to improve across the portfolio for the quarter, increasing to 72% of 2019 levels compared to 64% last quarter, driven almost exclusively by occupancy gains. We have been especially impressed with the robust recovery taking place in New York, with occupancy exceeding 74% during the quarter, up 500 basis points from the second quarter, while September rep are finished nearly 2% ahead of 2019 levels as occupancy surged to over 88%, and rate was over 10% above 2019 for the same time period. We expect the positive momentum to continue into the fourth quarter, driven in large part by a healthy pickup in group business, while Q4 transient pace on the books is now 95% at 2019 levels on a pro forma basis, up from 83% reported two months ago. In San Francisco, the recovery continues to take shape with an improving outlook. Third quarter occupancy improved nearly 1,400 basis points sequentially to approximately 65%, driven in part to the nearly 40,000 Dreamforce attendees during the month of September, with the event viewed as a major success for the city and signal the first major citywide event since the start of the pandemic. That said, Rate continues to be challenged, trending 14% below 2019 due in part to the mixed shift, which resulted in a third quarter RevPar decline of 41% to 2019. Excluding our four assets in San Francisco, third quarter RevPar for our consolidated portfolio would have been just 2% shy of 2019 levels. accounting for a 700 basis point drag on overall performance. Looking beyond the third quarter, the outlook for San Francisco continues to improve, with fourth quarter occupancy forecasted to reach the upper 60s, while REVPAR GAAP 2019 is expected to narrow to 29% of our 2019 levels by December. a vast improvement from the 90% rev par decline to 2019 recorded in January of this year. Looking to 2023, the outlook for San Francisco is encouraging, with the city set to benefit from a much stronger convention calendar of close to 640,000 group room nights forecasted for next year, or a 63% increase over 2022. Looking more closely at the group segment, we continue to witness positive group trends across the portfolio, illustrated by incremental bookings and lead volume improvement, with stronger conversion rates across the portfolio. This was especially evident post-Labor Day with September group pickup for 2023 coming in 106% ahead of the same period in 2019 for 2020, and with group ADR projected to be 40% higher. Generally speaking, group demand is coming more heavily from higher-rated corporate group with leads in the segment accounting for almost two-thirds of new demand, double the historic volume mix in 2019. Group pickup trends for future periods also continue to improve during the third quarter, with definite bookings for the fourth quarter increasing by $21 million, with more than half of the new bookings coming in September alone. Q4 2022 group pace currently sits at 77% of 2019, a pickup of 800 basis points since June, with definite bookings increase by over 90,000 room nights since the second quarter. For the year, definite bookings increased sequentially by nearly 10% to over $1.7 million, over three times the amount for the same time last year. Looking ahead to 2023, citywide calendars continue to improve in most markets with Honolulu, Chicago, San Diego, Boston, San Francisco, Seattle, and Denver all showing growth ahead of 2022 levels. As a result, we have witnessed a meaningful pickup in forward group bookings for 2023, with hotels adding over $51 million of group revenue into next year during the quarter. Currently, group pays for 2023 increased to 75% of 2019 levels, or 300 basis points higher

and what we reported during the second quarter.

Looking over to the balance of this year, we remain very optimistic that the recovery remains on track. We continue to witness improving operating trends across our portfolio and believe our portfolio will continue to benefit from the broader demand trends that favor outsized growth in business transient and group demand, and we expect to benefit from our reimagined operating model

ROI pipeline, and capital recycling efforts, all of which should help to support strong earnings growth over the next few years.

And now, I'd like to turn the call over to Sean, who will provide some additional color on operations, along with an update on our balance sheet and guidance for the fourth quarter.

Thanks, Tom. Overall, we were pleased with third quarter results, which were in line with expectations. As leisure continues to lead performance, along with ongoing improvements across our urban markets, a trend we expect to continue throughout the fourth quarter and accelerate into 2023. Performa Rev Power for the third quarter was $171, 8.8% below 2019 levels. Driven by widespread improvements in demand, with Performa occupancy improving sequentially by 80 basis points to 71.7%. and performer rates continuing to improve to $239 for the quarter, or 7% above the same period in 2019. Looking ahead to the fourth quarter, preliminary results in October look strong, with occupancy averaging approximately 74%, a nearly 200 basis point sequential improvement over September, while average daily rate during the month is projected to be approximately $243, or 4% above 19%. Overall, preliminary REBPAR for the month of October stands at $179, or less than 10% below 2019 levels. Although, if you were to exclude San Francisco, October REBPAR is 0.4% above 2019. Total Performer Hotel revenues for the portfolio were $642 million during the third quarter, while Performer Hotel adjusted EBITDA was $166 million. resulting in performer hotel adjusted EBITDA margin of nearly 26%. Margins were negatively impacted by demand softness in San Francisco, where our hotels have relatively higher fixed costs, which drove a 200 basis point drag on the portfolio. Finally, damage and disruption to operations from Hurricanes Fiona and Ian were minimal, with Q3 red par impacted by 20 basis points and adjusted EBITDA impacted by less than $2 million. Our hurricane preparedness team's efforts to protect our guests, hotel employees, and assets allowed operations to resume safely and quickly after the storms had passed. Turning to the balance sheet, we have continued to make meaningful enhancements to liquidity and financial flexibility. As Tom noted earlier, our liquidity as a quarter end was approximately $1.9 billion, including more than $900 million available on our revolver and $1 billion of cash on hand. and we expect total liquidity to exceed $2 billion following the closing of our pending asset sales. Net debt sits at $3.9 billion, nearly $300 million lower since the beginning of the year. We are currently working with our banking partners to extend our revolver, which we expect to finalize within the next couple of weeks, while evaluating several opportunities to address our $725 million CMBS loan, which matures late next year. With respect to additional near-term maturities, we have two small mortgage loans coming due next year totaling just over $100 million, and we expect to pay off those balances with available cash on hand as we continue to move towards a more unsecured capital structure. Turning to guidance, for Q4, we are establishing rep part guidance of roughly $163 to $166, or 92% of 2019 levels at the midpoint. While we continue to witness improving trends across several key urban markets, especially New York, Boston, and New Orleans, we expect San Francisco will negatively impact Q4 REVPAR performance relative to 2019 by approximately 850 basis points, partially driven by a tough comparison with the timing of the Dreamforce Citywide being held in September of this year versus October of 2019, when over 100,000 attendees participated in the event. For the bottom line, we are establishing adjusted EBITDA guidance between $140 million and $155 million, translating to AFFO per share between $0.35 and $0.43 for the quarter, while hotel adjusted EBITDA margins are expected to fall within a range of 24% to 25%, or 470 basis points below 2019 at the midpoint. Note, however, that Q4 2019 margins benefited from $21 million of business interruption insurance proceeds we received that quarter for our Key West and Caribbean Hilton hotels impacted by Hurricanes Irma and Maria. Excluding those payments, the margin gap between Q4 2022 versus Q4 2019 would be 270 basis points. Also note that our guidance considers recently closed asset sales. which contributed approximately $1 million to our quarterly earnings, and approximately $1 million of business interruptions in the fourth quarter related to Hurricane Ian. Finally, I wanted to provide additional guidance for our fourth quarter dividend. While it remains subject to Board approval, we currently expect the dividend to range between $0.21 and $0.26 per share, of which approximately $0.07 to $0.12 per share relates to distributions from operations. And the remaining $0.14 per share relates to gains from assets sold this year. This concludes our prepared remarks. We will now open the line for Q&A. To address each of your questions, we ask that you limit yourself to one question and one follow-up. Operator, may we have the first question, please?

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while the question queue pulls up. Our first question is from the line of Smeets Rose from Citi. Please go ahead.

Hi, thanks. Tom, I wanted to ask you a little bit more. Good morning. You mentioned that the forward group bookings for 23 are running at about 75% of 2019 levels, a little bit of a sequential improvement. I'm just wondering, is that rooms on the books, or is that a revenue number? And then could you just talk a little bit more about – what you're hearing from corporate clients and kind of maybe a little bit about the booking window.

Great question, Smedes. I hope you're well. As we mentioned during the prepared remarks, so group PACE is up for 23 at about 75.4%. It's about 300 basis points increase. That represents revenue and If you think back to some of the markets, obviously San Francisco, Florida across our portfolio, New York, New Orleans, Chicago, Hawaii, all continue to show really strong performance. So it's very encouraging from that standpoint. In terms of corporate negotiating rates, I mean, obviously those are ongoing and occurring now. I know some of our peers have used numbers in the 7% to 9% range, and we continue We certainly would find that to be reasonable. But again, those discussions are ongoing now as we prepare, obviously, for the budgeting season. But we're very encouraged by what we're seeing on the group side. And again, sequentially, that's an improvement and fully expect that that's going to continue to accelerate as we move out into later this quarter and certainly into 2023. Okay, thanks.

And then, Sean, maybe could you just talk a little bit more about how you're thinking about the refinancing of the debt on the San Francisco assets? You know, you mentioned it comes due next year. And maybe sort of help us think about the cost versus the 4% or so that's in place now.

Sure. Yeah, we're certainly looking at a few different market smears and some other options as well in terms of, you know, working with the current situation. So I would say that, you know, as we look at the markets, whether it's bank financing or, you know, call it CMBS, anything that's kind of in that kind of high single-digit debt yield, you're probably looking at call it 350 to 400 over SOFR. So that's kind of in the ballpark of kind of the cost. And, again, we're looking at more so probably a mortgage type of situation with an unencumbered assets like the Bonnet Creek Complex as a solution. Clearly, we'll, you know, continue to monitor, you know, the bond markets as well. Obviously not pricing what we'd be looking to do now, but if things kind of calm down and normalize a little bit, maybe you can see that as an opportunity. But I think more focused on kind of a mortgage route going forward at the pricing I just discussed.

Okay.

Thanks for that. Yep.

Thank you. Our next question comes from the line of Danny Adad from Bank of America. Please go ahead.

Hey, good morning, everybody. Good morning, Cam. Good morning, Cam. I have a cool question. So my first one is on RevPAR. Maybe just help us kind of think through, you know, you gave us the full Q4 RevPAR guide of, you know, down 8 versus 19, and then we know, you know, October downtime. Can you just help us walk through kind of how you expect November and December to progress sequentially? Sure.

I mean, we've talked through seven to nine down, Danny. Obviously, we'll look at October being down closer, call it 10%. Again, we mentioned on our call, or on the script, I should say, that San Francisco is certainly a good drag there. And ultimately, without it, we'd be up slightly. So I think as you look kind of into November, December, I think you see a sequential improvement down to the mid-single digits, clearly, as we go through the quarter.

Got it. And then, and then my other ones on a margin. So, you know, if you kind of look at the, you know, if we adjust for the BI proceeds in 19, you're kind of shaken out to somewhere that directionally looks like it's about a hundred basis points lower versus 19, you know, in Q4 compared to Q3. You maybe just help us understand how much of that is seasonality, how much of that is, you know, as you know, the urban cores of the country kind of recover from if there's a little bit of mixed shift going on and just kind of how to understand how that is going to progress.

Yeah, as you think about mixed shift, we're roughly down 300 basis points in group relative to Q2. Q2 was down 140. That was certainly a better quarter. A similar shift to 19 as Q3. But as you think kind of a flow through, I think, you know, we'll continue to kind of see improvement, improving flow through as you bring some occupancy back. And so I think, you know, for the most part, we feel pretty good about, you know, where the markets are going. But obviously, it's a tough comp given Q4, given the San Francisco drag, as well as the BI that we saw for Cree Bay, especially in Q4 2019, as you mentioned. Got it. Thank you.

Thank you.

Our next question comes from the line of Dory Keston from Wells Fargo. Please go ahead.

Thanks. Good morning, everyone. What would you expect to spend over the next two years on maintenance and ROI? And what returns are you expecting on the ROI projects you mentioned in your prepared remarks?

Generally, we're on a normalized basis, Joey, about 6% of revenue. We've always been on the higher end, just given the nature of the portfolio of revenues. That's one starting point. Obviously, that was disrupted, obviously, during the pandemic. If you think about what's in the pipeline right now, obviously, we're wrapping up Bonne Creek. There's another $80 million that we talked about, then the $70 million. So you're a few hundred million, you know, back of the envelope, I think would be a a good planning for what's in the pipeline. We are laser-focused, as we've said, in terms of priorities. Selling non-core, we're making really good progress there. You'll continue to hear more about that in the coming weeks. And, you know, using those proceeds to delever, but at the same time reinvest back into the portfolio, particularly with our ROI projects, and quite optimistic and really encouraged by that. And then, of course, we'll look for other capital allocation that could also include buybacks on a leverage-neutral basis. But, obviously, the priority is getting down the leverage and certainly reinvesting back into the portfolio. So, a few hundred, you know, depending on how many other projects we launch. We've got the Doubletree project in San Jose and converting that. It's in a planning phase now. You know, given the uncertainty, we clearly are are committed to getting the Bonnet Creek Resort and that expansion done. It's well underway, and as we mentioned, the Waldorf Ballroom will open next month, and obviously the Hilton Signia will in about another 13 months, plus or minus, and then we're also completely renovating the guest rooms, the public space, and of course our world-class golf course as well. Castle Marina, we've had enormous success with the REACH, the sister property there. We expect that we will have at least that, if not better, with a complete renovation of the Casa Marina as well.

Okay, thanks. And just digging into two of your larger markets, given what you know about a convention calendar in San Francisco for next year and hopefully the pending return of Japanese travelers to Honolulu, what kind of tailwind do you imagine that... there could be as a result in REVPAR for 23?

Yeah, it's a great question. I mean, if you think about San Francisco, I mean, I realize there's a lot of energy around it. And I'm, in fact, leaving here and headed out west. And I've been out there many times, as many know. But we are cautiously optimistic. I mean, if you think about the Park 55 didn't reopen until May of this year. Obviously, the Hilton was also not until the end of 21. So, you know, you've got both of those sort of ramping up. And, you know, we had RevPAR down 90% at the beginning of the year. And as we said, we expect that RevPAR will be down probably inside of 30% by the end of the year. That is ramping up quite nicely. And when you think about the citywide, there's 640,000 Room nights expected, that's about 63% of really the all-time high in 2019, coupled with probably 130,000 room nights approximately already on the books at that complex. So we would certainly expect a pretty dramatic increase. With a market like that with only 30,000 rooms, and clearly our complex there accounts for 10% of it, having that anchored with city-wide coupled with internal group allows us the great opportunity to really yield out the transient. So I don't have a revenue, a rev par figure for you today, but it really sets up nicely for a significant tailwind there. You know, Hawaii is, if you look about Hilton Hawaiian Village, it's just an extraordinary, I would respectfully submit, certainly one of the more valued assets in all of lodging. When we think about that asset where we still don't have the Japanese traveler back, and we're probably going to be flat to rev par this year, we're still expecting to be at or near an all-time high in EBITDA. So we are very encouraged by what we're seeing there. Now, a lot of that has been certainly domestic travel, but it's also been in Other international, international is normally about 30% of that asset. It's about 10% this year is what we're tracking. And the Japanese traveler now will have been gone for nearly three years. And historically, they stay longer and spend more. So we think that there's a tremendous tailwind. Waikolo has been 20% to 30% increase in RevPAR. And if you think about Hilton Hawaiian Village, which essentially will end the year It was up 7%, I believe, in the third quarter, but will probably in the year probably just flat to slightly negative. So I certainly would expect a double-digit increase in REVPAR as we look out, assuming, obviously, the economy remains healthy, which is what we believe today, absent any significant changes.

Okay, thank you. Thank you.

Thank you. Our next question comes from the line of Anthony Powell from Barclays. Please go ahead.

Hi, good morning. Good morning, Anthony.

Good morning, Tom. This question on New York, I mean, I think you highlighted how the market is recovering very strongly and the revenues are coming back there quickly. Question on margins there. I still think that margins are kind of trailing. What's the opportunity left there to kind of maybe improve the operating structure of that property? I know that was a big topic of discussion pre-COVID. So where are we in that process now?

That's a great question, Anthony. I mean, look, we have spent a lot of time and a great credit to our asset management team. We've been working with our operating partners and looking for ways to continue to streamline operations and you know, room service is a great example where it's sort of more of a knock and drop or, you know, we have limited food and beverage. Obviously, we've got significant food and beverages that relates to the group meeting and the banquet business, but really thinking about the business differently. And, you know, the pandemic forced all of us to better communication, better collaboration among the brands and as well as the management companies. And You know, we're anchored, as we've said, in the $85 million in savings and, you know, the 1,200 jobs that have been eliminated. And a lot of that is really in food and beverage and taking out assistant managers and taking out sales and marketing costs that candidly had become a bit accelerated over time. So clearly, as you see occupancy continue to rise, we'll see the full benefit of those margin improvements. but it's a really different operating structure than what we have today. We are very encouraged by what's happening in New York. I would remind listeners everyone was sort of writing off, I think, both New York and San Francisco and other urban markets six months ago, a year ago, through the pandemic. And, you know, I think New York is a great indication that it's coming back, and I think coming back pretty strongly. I mean, we were... If you think about where we were at the first quarter of occupancy, I think it was in the low 30s, second quarter at 69%. Obviously, the third quarter at 74%, and we're expecting probably Q4 to be in the low to mid 80s as an example. So I'd say that's ramping up nicely, and as we communicated on San Francisco's story, continue to see that as well, although certainly San Francisco is lagging for the reasons that we've noted. But New York is coming roaring back, and the city's been fully activated. And having really one of only three big boxes in the city really gives us a really competitive advantage and a foothold there. So we're quite optimistic about New York as we move forward.

And I would just quickly add that, you know, we certainly expect things to improve for Q4. As Tom mentioned, with Oximacy kind of improving, we saw Oxfam down 26 points. in Q3 and we're expected to be down more closer to 11 points in Q4. So getting the occupancy up will certainly improve the margins. I think we'll still have a gap, but also as we look at Q4, we're still down 20% on group revenue. So you gotta get the occupancy up and gotta get the group mix more normalized to kind of achieve the margins. But I would say that we're looking at middle to high double digits, or teens I should say, for Q4 margins versus what was kind of high single digits for Q3.

Thanks for that. And maybe on San Francisco, can you remind us how important business training is to that market and where BT is right now? Could there be any risk of some headwinds there next year? We keep seeing layoff kind of announcements from Twitter, Stripe, and whatnot. And if there's maybe a BT kind of slowdown or reversal in a market, could that maybe offset some of the strength you're seeing in group next year?

Yeah. I think, Anthony, if you look historically, I mean, I think the real benefit of of San Francisco was having obviously a supply constrained, a great convention market in following, having a strong leisure and a strong business transient. So I wouldn't say it's clearly a third, a third, a third. So I don't have the data in front of me. But if you look historically, it had been as strong a market as any. And particularly as I think back to 2006 through 2019, certainly was among the top three markets. And really, it was those strong sources of demand. No doubt that given what's happening on the tech side, certainly will be felt a little more in San Francisco. But the fundamentals of getting the convention market back, getting kind of return to office, we know that that's lagging. I know that the mayor and others are really pushing. But I wouldn't write off San Francisco over the intermediate and long term. I've said that before and certainly stand by it. We continue to monitor and study the market carefully. And we're not burying our head in the sand. We are out there and we are seeing some green shoots and some positive things. We certainly want to see that accelerate in 2023 and beyond. Thank you.

Thank you.

Our next question comes from Lionel Dwayne Senegwell from Everco ISI. Please go ahead.

Hey, thank you for the time.

Hey, Dwayne. Good to talk to you.

Hey, same here. Thank you. On the Japanese inbound traveler, I wonder historically, are there any differences in sort of the peak seasonality of that traveler, or does it line up? you know, does it line up pretty closely with, you know, peaks in Hawaii overall?

Dwayne, it's a great question. If you think historically, it's been about, you know, 9 million, you know, 8 to 10 million. Let's use 9 million as kind of inbound into Hawaii. About 60%, 62% of that coming from the U.S., second largest market really coming out of Japan. kind of $1.5 million plus or minus. Look, it's been consistent for 30 years plus or minus, particularly into that asset, and you've got generations coming. They tend to stay longer and pay more. In terms of seasonality, I think it's been pretty consistent. I don't know whether Sean's got additional data on it, but obviously the tour operators have been – have been a good part of it. But I think it really dovetails nicely. And given the capacity, we clearly have the capacity to accommodate that demand whenever it comes.

Yeah, I think you see a little bit of blip in the spring around Golden Week, around Japan. But I think, as Tom said, it's generally pretty consistent across travels, normal kind of vacation times.

Thanks. The reason I ask, it's, you know, we've seen some airlines try and launch Hawaii service, some successfully, some less successfully. And it just tends to be, I think the learning is it tends to be a longer lead time purchase consideration. To your point, you don't go to Hawaii for a weekend most of the time. You go for a longer period of time. And so I would expect there's a longer lead time in those purchase decisions as we think about travel restrictions going away. So it may just be a little too early to measure the success or failure of those easing travel restrictions.

My follow-up is... Dwayne, if I could just unpack that a little bit. I think it's a great point, but as I said, you've got north of 30 years, if not more, of really consistent, and if you look at those travel patterns coming out of Japan, it's been a loyal, consistent, easy-to-get-to on a relative basis. And so when you look at that pattern now, this will have been the third year where they've been virtually shut out. So I would respectfully submit that as we saw in the US with that sort of pent up demand, I would expect similar behavior. So the airlines will respond to that demand as we saw, certainly respond here in the US, although some did it better than others. But we're quite encouraged. And despite that, I mean, obviously we've got a resort here that continues to be an extraordinary performer. And we would expect when we get the Japanese traveler back that it will continue to accelerate that Rev Park growth. And we really haven't seen the Rev Park growth that some of our, that other leisure markets and that other of our peers have seen. So we see that as a real tailwind for Park as a, as we move into 23 and beyond.

That makes sense. Thank you for those thoughts. And then just apologize if you've covered this in another question. But, Sean, could you maybe just give us CapEx or capital spending, you know, 2022, 2023?

I mean, ultimately, Tom covered that.

I'll let Tom kind of... Yeah. We've certainly, Duane, you always had 6% of revenues. certainly higher than normal in part just given the nature of this portfolio. And as I said, we've got pending ROI projects that are active. And I said for planning, it's certainly a few hundred million dollars is a good base number to use. And that can flex depending on when we accelerate the Casa Marina or the complete transformation that we're planning for next summer. And of course, closing out the additional $80 million to finish up Bonnet Creek, which is going to be a complete rooms redo. The golf course, which we're quite excited about, is we really position that world-class resort there in Orlando and certainly be as competitive as any other property there.

Thanks very much.

All right. Thank you.

Thank you. Our next question comes from the line of Chris Waranka from Dorsey Bank. Please go ahead.

Hey, good morning, guys. Thanks for all the detail. Morning, Chris. Morning. First question was, I don't know, maybe we can zoom in on San Francisco group a little bit, Tom. I think you've given us a lot of data points and, you know, some encouraging, but I think on the rate side, right, not where we want it to be. Is this some kind of structural issue where San Francisco, from a group perspective, has become more of a value city in the higher dollar category? has gone to Vegas. And the question in that is, you know, it kind of matters for you guys, right? You want the higher-rated premium groups to really drive the EBITDA recovery there.

Yeah, I'm not sure that I would agree with that thesis, Chris. I mean, look, Vegas works, I think, for certain groups. But if you think about some of the high-end educational-based pharma companies And you think about the audience in San Francisco, I mean, they've historically had, if you think back to 2006 through 2019, and Vegas was still strong at that point, San Francisco more than held its own. I would think it's been the pandemic, the unfortunate negative narrative that got away from the city. I do think the city is correcting, whether it's street conditions, the homeless, the some of the safety and security issues. And you know that many of us have been out there and many other business leaders, men and women have also. I certainly know that the city gets that, and I think they're moving in the right direction. So I certainly would not. And given the fact that you've got a market that has 30,000 rooms in the CBD, take New York, it's 120,000 or more. So you have natural opportunity for real compression there. Obviously, for our portfolio and our complex, it certainly makes sense to have city-wide anchored with in-house group and then the ability to really yield that transient. So we are encouraged. I mean, the group pace this year is in the low 30% group pace. Next year, it's north of 50%. I think about 130,000 room nights was, I think, the number that I gave. And city-wides are at about 640,000. which is about 63% of 19, which was an all-time high. So encouraging. Look, we need San Francisco, that performance to continue to accelerate. As I reminded listeners, remember that Park 55 was closed for 27 months. It didn't open until May of this year. And there were many who made the comment that New York and San Francisco and others wouldn't be back until 25, 26 or later. I think it's fair to say that based on what we're seeing in New York and even the early signals here in San Francisco, that we certainly think that's going to happen before then.

Yeah, I mean, one thing I would add, Chris, is if you look at Q1, so let me start with Q1 pace for 23 relative to pre-pandemic levels, we're up, you know, for the complex 8% on on rate for PACE. So I think, again, coming from where it's been, I think it's very encouraging. And I think also as encouraging is what we saw the activity for in the month of September for booking for 23 for San Francisco, which really represented about 14% of the total rooms added that month and ultimately 20% of the revenue. So we got average rates of $433 booked for San Francisco for all of 23. I think some of that obviously is probably going into Q1 for JP Morgan. But in the end, it's an average rate of 433, which is 30% higher than, you know, the numbers we're seeing on the 8% pace I talked to you about, I just mentioned. So I think, again, encouraging and in the right direction for San Francisco on the group side.

Sure. Great. Super helpful. Just as a follow-up, how do we think about some of the puts and takes on margins going forward? I mean, we're We're going to have higher occupancy next year, hopefully. Rate mix could be, I guess, depends on your perspective, could be positive, could be negative. And really what I'm asking is, you know, whether it's kind of, you know, group margins on some of the ancillary stuff or even some brand initiatives. I don't know if you're continuing to work with the, you know, with Hilton and I guess the other brands to a lesser extent on, you know, further things, whether it's cost of loyalty or other that could be helpful going forward.

I think it's a number of things, Chris, if you think about building this back. I mean, clearly, occupancy, you're at a level where you're ranging in that, you know, 70%. So you're kind of getting to that point where you're going to have a lot of your layered fixed costs in, and you're going to basically, with added volume, just flow that better. I think with contingency rate growth in certain markets, obviously, you think about San Francisco and the drag that it is. I mean, if you think about it coming back, you know, it's going to certainly lift our REB PAR to 19 in our rates, And so I think as you think about the flow-through for our business, again, getting the mix in there with group, which is continually about 300 basis points less than what it's been in 2019, and therefore getting the banquet and catering revenue coming through, I think you certainly see a lot of opportunity for this to continue to grow and obviously go beyond where we were in 2019, as we've discussed with the the changes we made and the staffing changes we've made. So I think we certainly see contingency growth, obviously, with the business still performing. And we'll put aside the macro discussion for the moment with this. But I think in the end, we have certainly a path here towards getting to certainly higher margins that we're seeing here today.

Okay. Very good. Thanks, guys. Thanks.

Thank you. Our next question comes from the line of Neil Malkin from Capital One Securities. Please go ahead.

Thanks. Good morning, everyone. Hey, Neil. Good morning. Hey, good morning. Just maybe some clarity on the potential additional dispositions that you've talked about. Can you maybe highlight or give us some color on Are those just, you know, sort of the non-core, maybe, you know, not the upper upscale, you know, full service? Are they the one-off markets, JVs? You know, maybe potentially reshuffling of the portfolio, you know, reducing some exposure to troubled unionized markets that lag. Any help on that, you know, side of the ledger would be great.

Neil, it's a fair question, but let me also just say, and we've got a number of people in the queue here, and we want to try to answer as many questions as we can. And I know we're stacked up with a lot of other companies reporting today. Respectfully, no team has sold and moved more assets than we have since the spin. We're up to 38 assets now and $2 billion international revenue. 14 of those, as you know, South Africa, Brazil, Germany, seven in the UK, a joint venture in Dublin. I mean, we've seen it all and done it all. So we've worked on a lot of credit to the men and women on our development team and investment team and have worked really hard. Every one of the deals has legal, tax, other complexities. So it's a combination. We are constantly working on reshaping this portfolio. So I would say that their assets, over $100 million, they're non-core to what we would say long-term holding. We are not looking at this point, if your question is about some of the big urban boxes, we don't think now is the time. They're big, they're complicated, there are tax and legal issues, and with the debt markets where they are, we think there are other assets that are marketable, non-core, plenty of debt sources and private equity and or owner-operators and family offices, and I think we've shown a real skill in being able to sell and also do it efficiently and at pricing that makes sense. We're not a distressed seller. We're doing this thoughtfully and prudently, and we set a goal of $200 million to $300 million. We've already exceeded that. We've raised it now to $500 million, and we're confident we'll be able to deliver that and continue to use those proceeds to certainly de-lever and reinvest back into the portfolio.

Okay, thanks. Okay, thank you.

Thank you. Our next question comes from the line of Robin Farley from UBS. Please go ahead.

Great, thanks. Hi, Robin. Hi, how are you? In your release, you talked about the asset sales and how, given that you've been successful at selling more than you had targeted, that you might pivot between being defensive and offensive. And I'm just curious, is that suggesting that maybe you would be thinking about making acquisitions, or I don't know if that was more just about reducing leverage and reinvesting, but it sounded like pivoting between defense and offense could mean you're potentially interested in making an acquisition?

Yeah, we'd love to make an acquisition at the right time, Robin. You know, Remind listeners, again, we've sold the 38 assets for $2 billion. We obviously bolted on Chesapeake for those 18 hotels for $2.5 billion. So we've really been a net acquirer. It's just been silent here as we've worked through the pandemic. The priorities are, again, getting the revolver done. Sean and team are making great progress there, selling non-core, reinvesting back into our portfolio. And then, again, as I said, we will, as we have done, We'll look at buybacks depending on where the share price is, and clearly we traded a huge discount today, and if we can do some buybacks on a leverage-neutral basis, we'll certainly continue to look there and not lost on us given all of the uncertainty. Part of the reason why we want to continue to build tremendous liquidity is that there will be a time when pivoting to go on offense makes sense, and Parker will be ready, and Parker will be – active at that time. We don't think that that is necessarily today or this quarter.

Okay, great.

Thank you. Thank you. Thank you.

Our next question comes from the line of Patrick Scholes from Truist. Please go ahead.

Great.

Good afternoon, everyone. Good afternoon. There have been a number of sizable acquisitions amongst your public peers over the last several quarters. I noticed, you know, your folks have not been terribly active in the acquisition market. And, you know, I'm just curious as to your thoughts and rationale, you know, why you've decided to perhaps take a pass. And again, this is not saying that's right or wrong. I'm just curious as to, you know, what is your internal thinking of why you have not been active in that? Thank you.

Yeah. Well, thanks, Patrick. As you know, I'm not going to comment on others' deals, and I'll let them speak for themselves. I think we've been pretty consistent in what the priorities are for PARC, and we really wanted to use the pandemic and the post-pandemic to reimagine the operating model. As Sean pointed out, as we get occupancy back and we get later in this recovery, we are confident that we're going to see permanent savings and real value there. We want to continue to reshape the portfolio in selling and recycling that capital. We've sold 38. We'll continue to sell some of the non-core. Our top 27 assets really account for about 90% of the value of the portfolio. So cleaning it up, we think that makes sense. And the highest and best use of those proceeds is really reinvesting back into our portfolio, whether that's through the ROI or that's through targeted buybacks on a leveraged neutral basis and There will come a time when we will be a buyer. We just don't think that time makes sense right now for Park. And, you know, if you think about since the spin, we really have been more of a net buyer than seller, given the fact that we bought $2.5 billion versus selling the $2 billion. And then also, obviously, we've had a ton of buybacks over that period of time as well. So I'll stop there, and hopefully that answers your question.

It does. Thank you for the color.

Thank you. Our next question comes from the line of Bill Crow from Raymond James. Please go ahead.

Good morning, Tom. Good morning, Bill. I'm good. I'd like to discuss better with you than some of the big picture issues. I'm just curious. whether we might be talking about group and the recovery in San Francisco or Chicago or D.C., if that's not maybe missing the point here that we might be undergoing a larger paradigm shift in where groups might be heading. And I'm thinking about markets like Tampa, Nashville, Austin, Denver, and whether we're thinking about some of these old entrenched group markets. Maybe that's just wrong going forward. I just love to get your opinion on that.

Yeah.

Bill, I'd love, and I'd love to schedule, um, a followup, um, and have this discussion with you. I just don't think they're mutually exclusive. And I, I don't disagree with you that there are some really compelling things happening in a, in a Nashville or Phoenix and Austin. As you know, we, uh, I passed life for one of the largest owners of hotels in Austin, so I know it well. But I would also say that there are true and tried markets and infrastructure capacity in Chicago, in Boston, in San Francisco, Atlanta, that have worked and are really part of the rotation, D.C. And there are reasons why those associations and or those groups need to be or want to be in those markets with great airlift and other reasons. So I don't think they're mutually exclusive. And, you know, I think we're going to have to see over time. And I would respectfully submit that if you look historically at some of those top markets, and I put Orlando in, that there is a cycle here. in a rotation, and I would fully expect the Bostons and DCs and San Francisco's and Chicago's to continue to be part of that. Now, there's no doubt, and we won't get an argument here, Bill, about there are some structural challenges in some of these cities that need to be addressed. No doubt about that, and I think you and I have had it, and I would respectfully submit that I've tried to be constructive, and I've been a voice in written letters and made lots of comments on the subject, I think, as you know.

No, I do, and I appreciate your advocacy for the industry. That was it for me. I appreciate the time.

But I will schedule time with you, Bill, to continue this.

All right. Sounds good.

All right.

Good. Be well and always good talking with you.

Thank you. Our next question comes from the line of Jay Conridge. from SMBC. Please go ahead.

Hey, thanks very much. Good morning. Good morning. Can you provide some additional color on how you see the F&B revenue trending in 4Q and then the strength you see in this segment in 2023 as group demand and the convention calendar continues to ramp up?

I lost the first part of the question. We couldn't hear you, so if you could just repeat the first part again.

Yeah, sure. I was asking about if you can provide some additional color about how you see the F&B revenue trending in 4Q and then the strength of F&B in 2023 as group demand and the convention calendar continues to ramp up.

Yeah, F&B will ultimately come through certainly better than we saw in Q3 as we look at Q4. Clearly, you kind of get into the – into the season of, you know, holiday season and whatnot, you see a little bit of, you know, something ramp up in banquet and catering. It should ultimately, you know, kind of get to a point where it's rivaling Q2 F&B revenue. So I think certainly as you see, clearly as you see that mix more normalized on the group side, as certainly our pace would demonstrate that we're continuing to see improvement year over year, certainly you're going to see the F&B side grow. So we're certainly down significantly without the group mix in place there. So I think, you know, certainly as we go into next year, we'll certainly see the group mix normalized and F&B revenues, you know, certainly more normalized to 19 levels as well.

Okay. Thanks so much. I'll stop there.

All right. Thank you.

Thank you. Our next question is from the line of Chris Darling from Green Street. Please go ahead.

Thanks. Good morning. Hey, Chris. Good morning. Good morning. Tom, I appreciate the comments you gave on the transaction market already, but I'm just curious whether you could comment on any value changes you may have seen over the past couple of months, obviously being an active seller in the market. And then I wonder if possible, if you could delineate any of those changes across some of your major markets.

Yeah. It's a fair question. Obviously, given rising rates, if cap rates come in, they expanded 25 bips, maybe 50 bips, depending on, but we're still seeing a really healthy market for hotel real estate. I know the private equity funds, and I may be off a little bit on my numbers, but I think are sitting on about $400 billion of capital. You've got family offices. You've got owner-operators. So there is clearly demand, and as you look for yield, I would believe that lodging and expected lodging is going to continue to be an attractive asset class. You can't do only so many industrial and residential three-cap deals you can do. I think they get harder to do given where rates are. So we haven't seen any sort of slowdown. I do think that deals that have a story that also have an opportunity that perhaps with management or unencumbered tend to have perhaps a more bidding audience, but that's not always true. If it's a trophy asset, I think those fully encumbered are expected. So it really depends on the sub-market and the asset, but we're not having any issues or resistance in transacting, and I think we've been as active as anybody. We're thoughtful about it. We go through a process. We certainly are committed to make sure that we're maximizing value for shareholders, but we really are also committed to recycling capital and cleaning up the portfolio. And it's been a lot of hard work. People forget that we also had a laundry platform that we've also disposed of, and we had four assets that we were self-operating. All of that has been cleaned up and Great credit to Tom Morey, our Chief Investment Officer, and Nancy Vu, our General Counsel. The men and women on those teams have been working tirelessly over the last few years as we continue to reshape the portfolio. It is a much stronger portfolio than where we were six plus years ago when we were spun out.

Thanks for the comments. I appreciate the time.

My pleasure. I look forward to seeing you soon.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the conference to Mr. Tom Baltimore, Chairman, President, and CEO, for closing comments.

Thank you. We appreciate everybody taking time today. We look forward to seeing many of you at NARIT, and stay safe, and we'll see you hopefully out in San Francisco.

Thank you. The conference of Park Hotels and Resorts, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.